EUR (1.101) ▲

• The EUR has been on a rollercoaster ride in recent weeks, swinging between gains and losses. After initially giving up its mid-July gains, it surged back above the psychological 1.10/USD mark. Despite a stronger-than-expected 2Q24 GDP and elevated core inflation, the bloc's currency dipped below 1.08/USD on August 1, pressured by weak manufacturing data from both Europe and China. It later regained ground, lifted by a disappointing US jobs report and easing inflation figures.

• Although the EUR slipped below 1.10/USD again after an unexpected jump in US retail sales yesterday—up 1.0% MoM (Consensus: 0.3%)—elevated inflation risks in the eurozone, particularly with wages in Germany expected to rise sharply, could dampen expectations of an ECB rate cut and keep the bloc's currency buoyant near the 1.10 level. This, combined with a weakening US economic outlook and anticipated Fed rate cuts, bodes well for the EUR. However, the risk of slowing growth amid fiscal tightening could cap further gains.

GBP (1.285) ▲

• After climbing above the 1.30/USD level on July 17, fuelled by sluggish disinflation progress, the pound declined to as low as 1.27/USD on August 6, mainly in response to the Bank of England’s (BoE) 25 bps rate cut. However, the dovish shift in Fed rate expectations amid softening US inflation, alongside a less dovish recalibration of the BoE’s rate outlook due to mixed UK macro data, has helped limit the pound’s downside.

• The increasing likelihood that the BoE might hold rates steady in September, rather than cutting again, could continue to support the pound around the 1.28-1.30 level against the greenback in the coming weeks. The potential for a weakening dollar, driven by an anticipated 25 bps cut by the Fed next month, alongside sticky UK inflation, could bolster the case for a stronger pound. All eyes will be on Fed Powell’s tone during his Jackson Hole speech next week and the August jobs report (Sep 6), any sign of dovishness should help to lift the GBP.

Source: Kenanga Research - 16 Aug 2024